Established in 1970, SRF Limited is a chemical based multi-business entity engaged in the manufacturing of industrial and specialty intermediates. The company’s diversified business portfolio includes Fluorochemicals, Specialty Chemicals, Packaging Films, Technical Textiles, Coated and Laminated Fabrics.
Anchored by a strong workforce of 7,000+ employees from different nationalities working across eleven manufacturing plants in India and one each in Thailand, South Africa, and Hungary, the company exports to 90+ countries.
A winner of the prestigious Deming Prize for both Tyre Cord and Chemicals, SRF continues to redefine its work and corporate culture with TQM as its management.
The company’s revenue increased by 6.4% compared to last year, reaching Rs. 3,778 crores. Despite challenges in the Technical Textiles and Packaging Films businesses, the overall performance was in line with expectations.
The chemicals business saw a significant growth of 33.7% YoY, driven by strong performance in the fluorochemicals and specialty chemicals segments. However, there was a decline of 1.7% YoY in EBITDA, with an EBITDA margin of 24.7%. Profit after tax was Rs. 563 crores, a decrease of 7.1% YoY, but an increase of 10.1% QoQ.
SRF also announced a capital expenditure to establish an aluminum foil manufacturing facility, with the projected cost now expected to rise from Rs. 425 crores to Rs. 530 crores due to changes for improved output.
Valuation and Outlook
Despite a global demand slowdown, SRF reported good financial results. The chemicals business showed strong revenue growth in Q4FY23, with the fluorochemicals and specialty chemicals segments performing exceptionally well. However, the packaging films business faced challenges and experienced margin pressure.
SRF’s core business, chemicals, is expected to continue growing profitably as it expands into larger industries. Compared to its peers, SRF is in a favorable position in terms of profitability and growth, primarily driven by the chemicals business. Over the long term, SRF is expected to generate stable revenues.
Currently, the stock is trading at a P/E ratio of 28.4x/23.1x based on FY24e/25e EPS estimates. Our valuation suggests a target price of Rs. 3,000, indicating a potential upside of 17%, driven by the strong growth prospects in the chemicals business.
Key Concall Highlights
- Chemical Business Outlook: Looking ahead to FY24, the management expects the chemicals business to achieve a revenue growth of over 20%. They are focused on expanding into more complex products that bring greater value to the existing business. The company has a strong project pipeline in the chemicals segment, with Rs. 20 billion invested in progress, including the construction of 7 new plants for specialty chemicals and 3 plants for fluorochemicals.
- Specialty Chemicals: The management of the specialty chemicals division observed a rise in demand from their customers for complex and advanced products. To meet this demand, the company has strong plans to begin manufacturing 7-8 active ingredients, which are currently in the contracting process.
- Fluorochemical business: The management anticipates a continued positive trend in the fluorochemical business. They expect the demand for refrigerants to remain strong. Additionally, the management highlighted that starting from January 1, 2024, the US will reduce its production and consumption of refrigerant gas by 30%. This is advantageous for SRF because the US is a net importer, meaning it relies on importing refrigerant gas, which aligns with SRF’s business.
- Packaging Films Business Outlook: The management acknowledged that there will be ongoing pressure on margins in the medium term. The progress of the aluminum foil project is on track, and it is expected to start operating in Q2FY24. This project will enable SRF to provide solutions in BOPET, BOPP, and aluminum foil. The management also anticipates volume gains by improving the capacity of the South African unit, which will enhance operational efficiencies. Furthermore, they have positive expectations for the performance of the Hungarian unit in the coming quarters.
- Technical Textile Business Outlook: Regarding the technical textile business, the management noted that there are signs of improvement in the demand for Nylon Tyre Cord Fabric, indicating a revival. They also expect the demand for belting fabrics to remain strong, especially with a focus on infrastructure development. Additionally, the company anticipates a recovery in the demand for polyester industrial yarn, primarily driven by the geo-textile and seatbelts segments.
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